Opinion
No. 42439.
March 4, 1935.
Frank L. Warfield, of Washington, D.C. (Herbert R. Grossman, of Washington, D.C., on the brief), for plaintiff.
Fred K. Dyar, of Washington, D.C., and Frank J. Wideman, Asst. Atty. Gen., for defendant.
Before BOOTH, Chief Justice, LITTLETON, WHALEY, WILLIAMS, and GREEN, Judges.
Action by the Brooklyn Ash Removal Company, Inc., against the United States.
Petition dismissed.
Plaintiff sues to recover income taxes of $289,955.30, paid in the amounts of $151,940.63 for 1928 and $138,014.67 for 1930. The suit is grounded upon the claim by plaintiff that it was not liable for federal income tax upon the amounts received in each of the years under its contract with the city of New York for disposing of garbage, ashes, street sweepings, and rubbish collected in the borough of Brooklyn. It is contended that the income was received in the performance of an essential governmental function and that the contract was the governmental means or instrumentality through which the city operated.
The defendant insists, first, that plaintiff was an independent contractor; second, that the matter of collecting, removing, and disposing of the material in question was not an essential governmental function; and, third, that, in any event, the imposition of the federal income tax does not result in a direct burden on the municipality or constitute such an interference with the operation of the government of the city of New York as is prohibited by law.
Special Findings of Fact.
1. Plaintiff, a New York corporation, was organized August 7, 1913, under a charter, authorizing it to engage in business as a general contractor. The charter was very broad and comprised within its terms all of the general business activities usually engaged in by corporations of this character.
January 9, 1928, plaintiff entered into a contract with the city of New York whereby plaintiff agreed to receive from the department of street cleaning in the borough of Brooklyn and other departments of the city all garbage, ashes, street sweepings, and rubbish collected by the vehicles of the department of street cleaning in the borough of Brooklyn, or such material delivered by carts and vehicles of other departments of the city and by carts and vehicles whose owners had received authority from the department of street cleaning to use the dumps provided by plaintiff, and to finally dispose of such garbage, ashes, street sweepings, and rubbish as more particularly set forth in the contract and specifications in evidence as Plaintiff's Exhibit 1 and made a part of this finding by reference.
2. Prior to the signing of the contract of January 9, 1928, one Ward, through successful bidding, had secured in 1913 a contract with the city of New York. Plaintiff's board of directors, by assignment, took over this contract from Ward which constituted plaintiff's original contract with the city of New York. The 1913 contract was followed by other contracts, all pertaining to the same service and each resulting from bids. Plaintiff had consolidated with the Flushing Bay Improvement Company prior to entering into the contract of January 9, 1928; as a result of such consolidation, it acquired lands for dumping. Prior thereto, plaintiff had derived certain income from the Flushing Bay Improvement Company for filling. This process of dumping and filling in swamp land was carried on by plaintiff until a considerable amount of such swamp land was converted into firm land.
3. At the time the contract of January 9, 1928, was entered into, section 544 of the Greater New York Charter (Laws 1901, c. 466) provided as follows:
"§ 544. Said commissioner shall have power to enter into contracts with responsible persons and parties for the final disposition, for periods not exceeding five years of all or any part of the said street sweepings, ashes, or garbage, and such other light refuse or rubbish when collected; provided always that such contract shall be approved both as to terms and conditions by the board of estimate and apportionment. All contracts shall be entered into on behalf of the city by the commissioner with adequate security. He shall advertise for proposals in such newspapers in the city as he may designate, not exceeding three in number, for ten days, to perform the work in such form and manner and on such terms and conditions as he may prescribe. Such proposals may be for the performance of all or such part or portion of the work as he shall require. Each proposal must be accompanied by a certified check on a solvent banking corporation in the city, payable to the order of the comptroller for five per centum of the amount for which the work bid for is proposed in any one year to be performed. From the proposals so received he may select the bid or bids, the acceptance of which will, in his judgment, best secure the efficient performance of the work, or he may reject any or all of said bids. On the acceptance of any bid by him, the checks of the unaccepted bidders shall be returned to them, and upon the execution of the contract the check of the accepted bidder shall be returned to him. The surety or sureties upon all contracts hereby authorized shall be approved by the comptroller, and all contracts and bonds securing the same shall be approved as to form by the counsel to the corporation. The terms and conditions of all contracts for street sweeping and cleaning, or for the collection of ashes and garbage, shall, before they are entered into, be approved by the board of estimate and apportionment."
On August 19, 1929, the provisions of section 544 were amended by Local Law No. 13 (adding section 605 et seq. to Greater New York Charter), transferring certain authority to the department of sanitation. Said Local Law No. 13, in part, provided:
"§ 605-a. Department of sanitation. In order to more effectively promote and protect the public health and safety by central and uniform administration of the governmental activities embraced within this chapter, the department of sanitation is hereby established, the head of which shall be a sanitary commission, with the jurisdiction, powers and duties prescribed by this chapter. The main office of the department shall be located in the borough of Manhattan. The department may maintain a branch office in each of the other boroughs. The commissioners of the sinking fund shall assign suitable quarters to the department of sanitation."
4. The contract of January 9, 1928, ran from April 1, 1928, to March 31, 1933. It sets forth its purposes as follows:
"The purpose of this contract is to provide for: (1) The reception, transportation, and final disposition of all the garbage, ashes, street sweepings, and rubbish collected by the carts and vehicles of the department of street cleaning in the Borough of Brooklyn, which the city agrees to deliver to the contractor at the dumps to be furnished by the contractor herein provided for; (2) the reception, transportation, and final disposition of all garbage, ashes, street sweepings, and rubbish delivered by carts and vehicles of city departments other than the department of street cleaning, and by carts and vehicles whose owners have received authority from the department of street cleaning to use the dumps."
5. The contract provides for the prices to be paid plaintiff for the reception, removal, and final disposition of rubbish, ashes, and street sweepings and garbage by incineration. It also defines the amount of putrescible substance permissible in the several materials.
6. Among the many provisions of the contract are the following:
"(a) The city turns over to the plaintiff its two incinerating plants; (b) plaintiff is to furnish three rubbish and garbage incinerating plants, together with all necessary scows, equipment, labor, supervision, and everything necessary for the delivery at the dumps of said material; (c) calls for the construction and operation of incinerating plants at not less than fifteen dumps; (d) plaintiff must provide offices at the dumps for representatives of the street-cleaning department, who shall keep records of loads of material delivered to dumps; (e) disposition of waste to be subject to the approval and under the inspection of the commissioner; (f) city reserves right to sell permits for the use of dumps and for the privilege of depositing material on plaintiff's scows; (g) it is plaintiff's duty to receive and dispose of all such material; (h) plaintiff cannot complain if city changes method of delivery at dumps; (i) plaintiff to pay $48,000 a year for privilege of the pickings of the materials for reclamation purposes; (j) plaintiff is charged with the expense of removing all materials in event of the capsizing of vessels transporting same; (k) plaintiff to relieve city of liability for damages incident to delayed deliveries; (1) plaintiff to dismiss any of its employees if the commissioner decides such to be incompetent; (m) plaintiff to furnish the commissioner with weekly reports giving full data as to each scow and tow boat; (n) plaintiff is required to furnish $200,000 bond for its faithful performance, and to maintain a deposit of $100,000 in cash with the city comptroller as an additional security in the event of plaintiff's failure to comply with its contract; (o) plaintiff is bound by the determination of the commissioner on all questions of interpretation; (p) upon failure of plaintiff, city has the right to take over the equipment of plaintiff and operate same; (q) all employees of plaintiff are to be insured under the workmen's compensation law; (r) some of the incineration plants, upon completion of the contract, are to revert to the city; (s) penalties are provided for failures on the part of plaintiff; (t) plaintiff agrees to hold the city harmless from suits, damages, and costs, in the event of injuries to persons or property resulting from carelessness or negligence; (u) the commissioner may hire additional facilities, at the plaintiff's expense, in the event plaintiff fails or refuses to furnish a sufficient number; (v) plaintiff shall have no claim against the city for damages for loss of prospective profits when, in an emergency, the materials are not delivered with usual regularity."
7. Plaintiff's gross income during 1929 and 1930 was derived solely under its contract with the city of New York and incidental thereto. During those two years plaintiff had no other business. The entire cost of collecting, receiving, transporting, and disposing of such waste material throughout the entire city of New York, including the amounts paid to plaintiff under this contract, was covered by a single lump sum appropriation in the New York City budget.
Plaintiff continued to pay New York state franchise taxes and real estate taxes. It was the defendant in numerous civil suits brought by the city, county, and individuals. Also, it was the defendant under a criminal indictment in which it was charged with maintaining a nuisance.
Plaintiff provided its own labor and machinery, and most of its equipment in the carrying out of its contract. Under its charter, plaintiff was permitted to engage in any lawful business and did engage in business for profit.
8. Plaintiff filed income tax returns for the years 1929 and 1930 and included therein income received by it in the performance of its contract with the city of New York dated January 9, 1928. Upon such income there was computed, assessed, and paid by plaintiff a tax of $151,940.63 for 1929 and $138,014.67 for 1930. Thereafter, on June 14, 1932, plaintiff filed claims for refund of the entire tax so assessed and paid. The grounds of the claims were that the income received under this contract was not taxable since it was derived from the performance of an essential governmental function.
The Commissioner of Internal Revenue rejected these claims for refund on the grounds that plaintiff was not an employee of the municipality, that it was free to engage in other business, owned its own facilities, engaged its own employees; that the performance of the work was not established by law but by agreement obtained as a result of public competitive bids; and that although, to a limited extent, plaintiff was under the general supervision of the commissioner of the street cleaning department of the city, such supervision was not the control exercised by an employer over an employee which is the determining factor of the existence of that relationship, and, further, that plaintiff was an independent contractor.
Plaintiff was incorporated for the purpose, as stated in its certificate of incorporation, of carrying on a general contracting business in all its branches. During its entire corporate existence, it has been engaged exclusively in the reception, transportation, and final disposition of garbage, ashes, street sweepings, and rubbish in the borough of Brooklyn under successive contracts with the city of New York, the contract involved in this suit being a five-year contract which commenced April 1, 1928, and terminated March 31, 1933. The only income to plaintiff during 1929 and 1930 was received under and by reason of the abovementioned contract. All of its contracts with the city of New York were the result of successful bids made by it.
Plaintiff filed federal tax returns for the years in question and reported thereon as gross income amounts which it had received under its contract with the city of New York. The tax computed upon the income shown on the return was paid to the collector at New York. Subsequently a claim for refund was filed on the ground that "the amounts received by the taxpayer under this contract are nontaxable since they are derived from the performance of an essentially governmental function under the Constitution of the United States of America, and under the decisions of the United States Supreme Court, particularly, Burnet v. Coronado Oil Gas Co., 285 U.S. 393, 52 S.Ct. 443, 76 L.Ed. 815, decided April 11, 1932." The Treasury Department rejected the claim.
Plaintiff's contract with the city of New York provided that (1) plaintiff should receive, transport, and finally dispose of all the garbage, ashes, street sweepings, and rubbish collected by the carts and vehicles of the department of street cleaning in the borough of Brooklyn, which the city agreed to deliver to the contractor at the dumps to be furnished by the contractor, therein provided for; and (2) plaintiff should receive, transport, and make final disposition of all garbage, ashes, street sweepings, and rubbish delivered by carts and vehicles of city departments other than the department of street cleaning, and by carts and vehicles whose owners had received authority from the department of street cleaning to use the dumps.
The contract further provided that the contractor should pay to the city $48,000 per annum for the privilege of picking over and reclaiming from the materials delivered at the dumps or transfer stations such valuable articles as it might desire, and such sum was to be paid through a deduction by the city of $4,000 from each monthly payment to be made to the contractor under the contract. The city agreed to pay the contractor 58 cents a cubic yard for the reception and final disposition of garbage by incineration; 58 cents a cubic yard for reception, removal, and final disposition of rubbish, and a like sum per cubic yard for the reception and disposal of ashes and street sweepings.
This case presents a question which in its broad aspect has frequently been before the courts. The implied constitutional prohibition against taxation by the federal government of agencies or instrumentalities of a state or municipality is limited to protecting the states, their agencies and instrumentalities, in the performance of their strictly governmental functions against substantial interference through taxation by the federal government. A tax offends the prohibition only if it is imposed directly upon an essential governmental instrumentality, or, if not so imposed, its effect is to place a direct and substantial burden upon the exercise of an essential governmental function. Metcalf Eddy v. Mitchell, 269 U.S. 514, 46 S.Ct. 172, 70 L.Ed. 384; Willcuts v. Bunn, 282 U.S. 216, 51 S.Ct. 125, 75 L.Ed. 304, 71 A.L.R. 1260, and Indian Motorcycle Co. v. United States, 283 U.S. 570, 51 S.Ct. 601, 75 L.Ed. 1277; Wiltsie v. United States, 3 F. Supp. 743, 78 Ct. Cl. 293.
In our opinion the plaintiff, in its service to the city of New York in the final disposition of the material delivered to it by the city, was an independent contractor. The federal tax upon its income was properly returned and paid under the rule laid down by the court in Metcalf Eddy v. Mitchell, supra, New York Trust Co. v. United States, 63 Ct. Cl. 100, and Mesce v. United States, 64 Ct. Cl. 481. For this reason we deem it unnecessary to discuss the question whether the disposition by plaintiff of refuse collected and delivered to it by the municipality was in the performance of an essential governmental function as that term has many times been defined in the decided cases; however, see Quill v. Mayor of City of New York, 36 App. Div. 476, 55 N.Y.S. 889, in which the Appellate Division of the Supreme Court held that the duty imposed on New York City of removing dirt accumulating in the streets and ashes and garbage from residences is a quasi private duty and no part of the exercise of the city's governmental functions. See, also, City of Denver v. Porter (C.C.A.) 126 F. 288.
All of the powers of supervision and partial control retained by the city of New York under the contract were such as are common in all contracts for services to municipalities. They were only such as were essential to ordinary operation in the execution and daily compliance by plaintiff with its contractual obligation. Plaintiff provided its own labor and machinery and most of its equipment in carrying out its contract. It was free to engage in any lawful contract and did, under its contract, engage in business for profit. It was not an employee of the municipality and the performance of the work which it did was not established by law but by its contract with the city of New York. Plaintiff's contract with the city was the result of public bids and under the facts and circumstances in this case it cannot, we think, be said that the effect of the tax on plaintiff's income placed a direct or substantial burden upon the functions of the municipal government. Assuming, without deciding, that the removal and disposition of garbage, ashes, etc., by a municipality is an essential governmental function, it is our opinion that in this case there was only a remote, if any, influence upon the exercise of such functions of government. Willcuts v. Bunn, supra; Marland v. United States, 53 F.2d 907, 3 F. Supp. 611, 78 Ct. Cl. 69; Wiltsic v. United States, supra. The petition must be dismissed. It is so ordered.